De Facto LLC Manager Breached Fiduciary Duties Through "Unilateral and Unauthorized" Acts

In a recent order, the Appellate Court affirmed a Cook County trial court decision finding that a de facto LLC manager in a manager-managed LLC: (1) had fiduciary duties to the other members despite not being the legal manager; and (2) breached his fiduciary duties to his co-owners by running the business and finances without regard for the other members. Kenny v. Fulton Assocs., LLC, 2016 IL App (1st) 152536-U.

The de facto manager had a 50% interest in the company, and two other members shared the remaining 50% interest.

After an eleven-day trial, the trial court found that the de facto manager breached his fiduciary duties by making "unilateral, unauthorized decisions," including: (1) hiring an attorney in the litigation and paying him with company funds; (2) compensating another business of his with company funds; (3) falsifying articles of amendment to the operating agreement; (4) opening bank accounts, funded with company money, accessible only by him and his son by not his co-owners; and (5) directing the company's accountant to file tax returns that ignored the other members' ownership interests in the company. Id. ¶ 34.

On appeal, the de facto manager argued that he was not the legal manager and therefore had no fiduciary duties. See Id. ¶¶ 63, 66. He also argued that if he have did have fiduciary duties, the trial court erred by deciding that he had breached them. Id. The Appellate Court rejected the de facto manager's argument regarding the existence of fiduciary duties because under the Illinois LLC Act, a member in a manager-managed LLC may have fiduciary duties to other members "if the member 'exercises the managerial authority vested in a manger by the Act." Id. ¶ 67 (citing 805 ILCS 180/15-3(g).)

The Appellate Court also affirmed the trial court's finding that the de facto manager breached his fiduciary duties to the other members by unilaterally making decisions to the detriment of the other members without their authorization, as described above. Id. ¶ 69. Further, the other members were damaged by the de facto manager's payment of his own attorney fees in the litigation with company money. Id. ¶ 71.